Understand Your Marketing Dollar
Many people pour money into marketing and don’t know what kind of return they are getting. To help you understand where your marketing dollar is going let’s pretend that we own an online clothing store and we want to start putting money into Google Ads. We don’t really know how much money is a reasonable amount to start with but business has been doing really well so $500/month was decided.
After setting up our Google account we design some ads and get them going. Halfway through the month, we realize we only have $100 left in the monthly budget. We have noticed an increase in sales and decide to increase our budget by $200 because things are going well. Now we have to decide if our $700 this month was worth it.
Before we decide how much each customer cost us, it is important to understand how much each customer is worth to us. On average, customers account stays active, at least 6 orders per year, for 5 years. The average order $100. This means that each customer, on average, is worth $3,000. This is the customer’s’ lifetime value. We know that not every customer is worth that much but many are worth even more.
Now let’s look at our Google Ads. We only had 6 customers click on your ad and make a purchase. This means it cost us $117 to get each of those customers. Some people will look at that and think it was a bad investment. If the average order is only $100, we don’t want to spend more than our contribution margin on each customer. (Contribution Margin is the price you sold the good for, minus the price you paid for the good. Each $100 dress only costs us $30 to make so our contribution margin is $70.)
Customer Lifetime Value
This way of thinking is exactly why we looked at the customer’s lifetime value. It is the best way to understand your marketing dollar. If they only order that one time, we will lose some money, $47 to be exact. However, if they behave like our average customer, $117 to get the customer is minuscule compared to the $3,000 they will spend over the next few years.
When you start spending money on marketing, keep track of how much each customer is costing you, but also how much you will make off them. It can make a big difference.